Friday, October 17, 2008

Stem cell firm grows its own funding

By Stephen DeSantis

When stem cell therapy biotech firm Arteriocyte Inc. launched a new 6,000-square-foot manufacturing and distribution facility in Hopkinton in September to sell medical devices, it marked a lesson in creative alternative funding.

For the fledgling company, competition for venture financing was fierce, said Don Brown, Arteriocyte’s CEO. But the four-year-old biotech, still steeped in R&D costs, no longer receives outside funding. Fortunately, it does not need to.

“We think we are in a position to be entirely self funded,” Brown said.

Arteriocyte’s stem cell technology was developed at Case Western Reserve University, which then spun out the firm in 2004. The university seeded Arteriocyte with a mere $250,000 and the Hopkinton-based biotech raised $29 million through a combination of grants, state award programs and private investments.

But to increase its capital significantly, the company came up with a creative way to self fund. Together with the Salt Lake City venture capital group DW Healthcare Partners, Arteriocyte formed a medical device business called Arteriocyte Medical Systems Inc. (AMSI), spending $10 million to purchase the rights to Medtronics Inc.’s Magellan instrument. Magellan is a platelet and stem cell separator that can be used to concentrate stem cells for harvesting.

Arteriocyte the biotech is developing a technique to jump start the body’s own repair process by producing cells responsible for healing from a patient’s adult stems cells. These cells are then injected into the body at an injury site. The firm is testing its therapy with cardiovascular injuries, but it has applications in wound repair and ocular regeneration, Brown said. 

For a risk-averse venture capitalist, Arteriocyte’s unproven stem cell therapy might not get the attention it deserves, but a medical device startup formed around an existing — and revenue generating — product was a whole different story.

For Brown, the strategy was twofold. Fund Arteriocyte’s R&D with revenue from a profitable medical device business and use the Magellan device as one of the biotech’s primary research tools.

“If the company is properly self-funded, that is wonderful. The question would be, is it going to reach certain repeated value inflection points (without) the proper capitalization,” said Michael Lytton, general partner of Boston venture firm Oxford Bioscience Partners.

And Lytton said he worries that it would be difficult to have such different business activities under one roof.

“It is hard to get the right skill sets in a company where there is such divergence in activities, with biotech research going on and commercialization of a medical device,” Lytton said.

Grants have helped Arteriocyte make it through the lean times. It has received about $7.5 million in funding from a series of U.S. Department of Defense, National Institutes of Health (NIH) and academic grants over its short history. One year after its inception, the biotech was already gearing up for clinical trials with a $1.5 million award from the National Heart, Lung, and Blood Institute.

Brown said more grants are forthcoming.

He added that the medical device business unit will add another 15 sales reps next year to churn up more R&D money for the biotech business. Together with AMSI, the two businesses have a total of 30 employees.

“We’ll do $10 million this year in revenue. The beauty of that is it helped us build a field sales force for future products and drive Arteriocyte ourselves,” Brown said.